Bollard gives a bit but signals warning on house prices

Reserve Bank governor Alan Bollard chose the conservative route in cutting the official cash rate (OCR) from 5.25% to 5% today, ignoring pleas for a larger cut.

Thursday, July 24th 2003, 8:20PM

by Jenny Ruth

Indeed, David Drage, chief economist at ANZ Bank, sees the wording of today’s statement as "somewhat more neutral" than the reasoning behind Bollard’s previous decisions and rates the probability of a further rate cut in September, when the central bank releases its next monetary policy statement, as "less than 50%."

Bollard acknowledges that activity and inflation in some parts of the economy are slowing as he had expected, particularly the export sector which he says is "now being significantly affected by the rise in the exchange rate over the past 18 months."

The New Zealand dollar could rise further, partly depending on the international economy. Bollard notes the latter is "fragile but has shown some brighter signs recently."

On the other side of the ledger, he signalled definite concerns about the housing market, which will no doubt be stimulated further by today’s cut.

In particular, Bollard notes that housing inflation is already "quite strong" and that "some investors have unrealistic expectations about this."

Stephen Toplis at Bank of New Zealand says annual housing inflation at 14.1%, as was shown in the Real Estate Institute’s latest report, "is clearly outside the Reserve Bank’s comfort zone. The apparent beginnings, I would stress beginnings, of a bubble in the housing sector would bother the bank."

Toplis sees Bollard’s comments as a warning to house buyers against having expectations that house prices will keep rising at such a rate. If house prices do keep rising at such a pace, Bollard will certainly apply the brakes, he says.

Anthony Byett, chief economist at ASB Bank, says that the chances of a further rate cut rest of whether the New Zealand dollar keeps rising or on a renewed faltering in the global economy.

"They’ve left open the door for a further cut, if required," he says

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